Insurance Markets
January 2004
Introduction
health plan legislation would cause considerable
Legislation passed by the U.S. House of
disruption to the market without reducing the
Representatives and advocated by the Bush
number of uninsured. They raise concerns that
administration would allow business associations
AHPs would be able to attract healthier groups,
to offer federally licensed health insurance plans
thereby increasing prices for people in the state-
that are exempt from state insurance regulation.
regulated part of the health insurance market.
Associations representing small business have
They also argue that the legislation would allow
been promoting such legislation for many years,
AHPs to operate in a largely deregulated environ-
arguing that it would result in lower premiums
ment, resulting in inadequate health benefits
for health insurance, expand coverage to the
for many consumers, managed care plans with
uninsured, and give small business more bargain-
fewer protections for patients, greater consumer
ing leverage with insurers.
exposure to the risk of plan insolvency, and, in
1
Small businesses face special challenges in provid-
some cases, fraud.
ing health insurance to their employees. Compared
This brief provides a short summary of the AHP
to large employers, they are less likely to offer
legislation and highlights the key findings of a
coverage, often face higher premium increases,
study prepared for the California HealthCare
and tend to provide more limited benefits. A large
Foundation that examines the likely consequences
percentage of uninsured people work for small
of the bill for California consumers and the
firms or are dependents of those who work for
state’s health insurance market. (The complete
small businesses. Support for federal association
study, “What Would Association Health Plans
health plan (AHP) legislation recently has taken
Mean for California?: Full Report” is available at
on new urgency, in part because the double-digit
www.chcf.org.) In preparing the larger report, the
annual premium hikes of the past few years have
authors analyzed the federal legislation, reviewed
made it much more difficult for small businesses
other studies of the legislation’s impact, and
to afford health insurance.
interviewed experts and industry representatives
On the other side of this debate are consumer
groups, state government officials, and the insurance industry. They claim that the association
familiar with the California market, as well as
opponents and proponents of the legislation.
ISSUE BRIEF
What Would Association Health Plans Mean for California?
Background
now comprise a very small part of the market. What’s
The AHP legislation (HR 660 and S 545) would
more, California law does not permit any new MEWAs
directly affect people receiving coverage from private-
to be licensed, in part because these types of arrange-
sector employers as well as consumers who purchase
ments have a long history of financial instability. Under
individual policies. It would not apply to those enrolled
the proposed federal law, AHPs, which are a type of
in government-sponsored employee health plans and
multiple-employer arrangement, would be licensed by
government insurance programs such as MediCal.
the federal government and operate under federal
About 77 percent of covered workers in California are
in fully insured plans that are licensed and regulated
by state agencies. The rest are in self-insured plans.
supervision. AHPs would draw employer groups and
individuals from existing market segments, leaving less
of the market under state supervision.
Self-insured, private-sector plans operate under federal
employee benefit law and are not regulated by the
2
state. The prevalence of self-insurance is relatively low
in California, due in part to the popularity of stateregulated managed care products. Therefore, California
currently regulates a much larger percentage of its
health insurance market than most states. The smallgroup health insurance market (serving employers with
2–50 employees) is the most heavily regulated. Under
existing state and federal laws, insurers who sell smallgroup policies must offer coverage to small businesses
upon demand—even when a group is expected to
Highlights of Federal Association Health Plan
Legislation (HR 660 and S 545)
• Creates federal licensure of health plans sponsored
by professional and trade associations.
• Sets up criteria for association health plans (AHPs)
to qualify for licensure.
• Allows AHPs to offer coverage to employers of
any size or individuals.
• Establishes federal standards for fully insured
and self-insured AHP coverage.
• Exempts AHPs from state insurance laws,
including rating rules and benefit mandates.
pricing policies based on the medical conditions of
• Requires self-insured AHPs to meet federal
solvency standards. (Allows state solvency
standards to continue to apply to fully insured
policies offered by AHPs.)
group members.
• Authorizes AHPs to operate nationwide.
In addition, California regulates five licensed multiple-
• Gives U.S. Department of Labor authority to
license and regulate AHPs.
have high future medical claims. They must also renew
such policies and stay within regulatory limits when
employer welfare arrangements (MEWAs) that cover
approximately 250,000 people. These provide a way
for employee health plans to band together to try to
increase their purchasing power, and in some cases they
have improved access to health coverage for certain
types of businesses and people with seasonal jobs, such
as agricultural workers. However licensed MEWAs
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C ALIFORNIA H EALTH C ARE F OUNDATION
For complete bill summary see Appendix on p. 30 of full report.
www.chcf.org/topics/view.cfm?itemID=21661
Key Elements of the AHP Legislation
The bills would allow insurers and managed care firms
The House and Senate legislation would create federal
to sell AHP policies in the state without complying
licensure for association health plans (AHPs) offered by
with California’s standards as long as such policies were
qualified business associations, exempting such plans
approved for sale by another state. Additionally, the
from state insurance standards and oversight. The U.S.
bills would allow insurers selling AHP coverage to
Department of Labor would license and regulate AHPs.
market these products not only to members of the
The legislation would authorize qualified associations to
offer both fully insured and self-insured coverage to
association, but also to employers that are eligible for
membership but not enrolled.
member employers and individuals. Fully insured AHPs
The bills would allow AHPs to target marketing to
would pay a premium to an insurance company or a
healthier risks in a number of ways. For example,
health maintenance organization (HMO), which would
depending on factors such as its membership base, an
assume the risk for paying claims. Self-insured AHPs
AHP could offer or restrict coverage to certain types of
would retain the risk for paying claims. In either case,
employers and individuals. The bills’ language appears
the AHP or a sponsoring organization would collect
to allow an AHP to establish eligibility criteria based
contributions from member employers or individuals.
on the size of the firm. (In California, insurers inter-
Both the AHP and its insurer would have discretion,
with few exceptions, to design coverage options offered
through an AHP, and select covered benefits, care and
services, and providers. AHPs would not be subject to
most state laws setting standards for health insurance
policies, such as those requiring inclusion of certain
benefits and services and protecting vulnerable
populations.
viewed said they already charge firms with fewer than
10 employees the highest allowable rates because utilization of health care is highest on average among the
smallest employer groups.) AHPs also could attract
healthier risks because these plans would not be subject
to state benefit mandates and rating laws. Less comprehensive, lower-cost benefits offered by AHPs would
tend to be more attractive to healthier groups and
individuals than those with medical conditions.
Although the legislation does require AHPs to renew
coverage, the coverage may be different from the original
policy bought by an employer. Therefore, an AHP
would be able to switch an employer to another type of
coverage if plan members developed expensive medical
conditions. Current law requires insurers to renew
policies regardless of the claims experience of the group
Language in the legislation is ambiguous on many key
consumer protection issues. These include:
Guaranteed access to AHP coverage. It is not clear if
some small businesses could be excluded from AHPs
on the basis of an employer’s risk characteristics (e.g.,
by using a proxy for risk such as size of employer).
and, if the insurer changes an employer’s benefits upon
Premiums. The legislation does not require an AHP
renewal, such changes must apply to all employers with
to comply with state premium rules, which limit insur-
that policy.
ers’ ability to charge small groups with people in poor
health a higher rate than groups with healthy people.
Insurance Markets: What Would Association Health Plans Mean for California?
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3
However, due to ambiguous provisions, it is unclear
Budget Office (CBO) determined that small-group
how premiums would be set for small businesses
enrollment would increase by less than 2 percent
enrolled in AHPs and whether small businesses with
were they to become law. An Urban Institute study
relatively high medical costs could be surcharged
(commissioned by the California HealthCare
without limitations.
Foundation in conjunction with this report) came to
Managed care standards. The federal legislation
a similar conclusion with regard to California, finding
would establish new standards on how state law would
that the legislation would do little to change the level
be preempted with regard to AHP coverage. Because
of overall coverage in the state.4 (The study, “The
courts may interpret these standards differently than
Effects of Introducing Federally Licensed Association
current preemption standards applying to private-
Health Plans in California: A Quantitative Analysis,”
sector health plans, it is not clear which, if any, state
is available at www.chcf.org.)
consumer protections would continue to apply to
Passage of federal AHP legislation could, however,
insurance and managed care products offered by
significantly alter California’s private-sector health
AHPs. (See Table 1.)
insurance market, with some small businesses and
insurers benefiting and others being adversely affected.
Findings
Despite claims made by some partisans on both sides
of the AHP debate, studies of the legislation’s impact
Many of the roughly 22 million Californians whose
health insurance is now regulated by state agencies
would find themselves in AHP plans licensed and
by impartial analysts estimate that the legislation
regulated by the federal government and other states.
would have a minimal effect, if any, on the number
of uninsured. For example, in examining two versions
of the AHP legislation, the non-partisan Congressional
The most significant impact would likely occur in
California’s small-group market, which covers about
Table 1: Impact of Proposed AHP Legislation on California Consumer Protections
CALIFORNIA
S TA N D A R D S
CA-regulated Insurance (non-AHP)
Current Law
Proposed Legislation
Self-insured AHPs
Current Law
Proposed Legislation
Fully insured AHPs
Current Law
Proposed Legislation
Small Group
Reforms 3
Apply
Still Apply
Apply
Would Not Apply
Apply
Would Not Apply
Managed Care
Standards
Apply
Still Apply
Apply
Would Not Apply
Apply
Unclear*
(probably preempted)
Benefits
Requirements
Apply
Still Apply
Apply
Would Not Apply
Apply
Would Not Apply**
Protection
for Special
Populations
(e.g., Cal-COBRA)
Apply
Still Apply
Apply
Would Not Apply
Apply
Would Not Apply
Solvency
Requirements
Apply
Still Apply
Apply
Less Stringent Federal
Solvency Requirements
Solvency rules apply to insurer
under contract with AHP.
*State law may be preempted by federal legislation. Additionally, if not preempted, then state law may not apply if the insurance company or HMO files
the policy form for approval in another state. Only that state’s standards would apply. “Prompt pay” law explicitly not preempted.
**State laws implementing the federal Newborns and Mother’s Health Protection Act, Mental Health Parity Act, and the Women’s Health and Cancer
Rights Act would still apply. For a detailed discussion of benefits requirements, see full report.
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C ALIFORNIA H EALTH C ARE F OUNDATION
three million people, because this is the most highly
apply to health plans covering most state residents
regulated part of the market. The following section
and include independent external review of coverage
describes some of the key ways federal AHP legislation
denials, would be nullified for workers whose employ-
would affect consumers and the California market.
ers bought AHP coverage. People in self-insured AHPs
would lose state-based dispute resolution options they
Impact on Consumers
now have. Broadly preempting state laws while not
Winners and losers. The AHP legislation would create
replacing them with comprehensive federal standards
winners and losers among consumers, particularly
would result in fewer protections for consumers covered
those covered by the small-group market. Many small
by AHPs than consumers would have in state-regulated
firms with relatively healthy employees might be able
health plans. On the other hand, fewer regulatory stan-
to buy less-expensive, less-regulated coverage through
dards would make AHP coverage less expensive.
AHPs than they now can in the state-regulated market.
Employer groups with higher-than-average health
Increased market complexity. The introduction of
costs, however, would be more likely to remain in
self-insured AHPs regulated from Washington, D.C.,
the state-regulated market. As premiums in the state-
and of fully insured AHPs regulated both by the
regulated portion rose, some groups might be priced
federal government and by out-of-state insurance
out of the market.
departments would greatly complicate California’s
health insurance market.
If AHPs drew off many of the healthier groups, the
risk pool in the state-regulated small-group market
California’s health insurance market is already more
would become comparatively sicker — driving up their
complex than most because two state agencies split
premium rates. Over time, this could make it difficult
jurisdiction for managed care and more traditional
or impossible for some small businesses and workers to
health insurance products (with some overlap).5 As in
obtain and afford coverage.
other states, federal law also currently allows privatesector employers to self-insure their plans and avoid
Loss of consumer protections. Consumers enrolled in
state regulation.6 Adding various types of federally
AHPs would lose state-based consumer protections.
licensed AHPs to the regulatory mix, as would occur
Federally licensed AHPs would be exempt from many
under the proposed legislation, could be very confusing
state insurance laws, including most benefit mandates,
for consumers; people encountering problems with
coverage continuation requirements, solvency standards
their coverage often need to figure out which set of
(for self-insured AHPs), and small-group market
regulations apply to their health plan as well as where
reforms, which include requirements for insurers to
to turn for help in navigating those rules. To settle
sell products to small groups regardless of their health
disputes with the health insurers, consumers might
status and limitations on surcharging groups with sicker
have to negotiate with insurers and seek help from
employees. (See Table 1.) Due to ambiguous language
regulators in other states. And if disputes were not
in the legislation, it is unclear whether California
resolved, individuals might have to take insurers to
standards for managed care plans, which currently
court in other states.
Insurance Markets: What Would Association Health Plans Mean for California?
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5
Impact on Health Insurers and the Market
5 percent. Studies commissioned by proponents and
A shift to AHPs. A significant portion of the existing
opponents of AHP legislation have estimated larger
state-regulated small-group market could shift to feder-
effects on the market.
ally licensed AHPs. Due to the complexity both of the
market and the legislation, it is difficult to predict the
degree to which AHPs would draw employer groups
away from the state-regulated small-group market
and the degree to which premiums in various market
segments would change.
One reason that AHP market penetration would be
significant is that insurers would face strong financial
incentives to enter and provide restricted benefits
through the AHP market, in part as a strategy to defend
against adverse selection. Insurers operating in the stateregulated portion of the market also might respond by
Studies summarized in the full report provide a range
offering policies similar to health benefits offered by
of estimates. In July 2003, the CBO, the agency that
AHPs to the extent allowable under state law.
provides cost estimates of federal legislation, released
a cost estimate of HR 660 finding that by 2008, when
the effects of the legislation are assumed to have their
full impact, about 24 percent 7 of people covered in the
small-group market nationwide would be enrolled in
AHPs.8 In 2000, the CBO estimated that an earlier
version of the legislation would result in a somewhat
smaller AHP market penetration (19 percent) and
would lower premiums by about 13 percent for firms
purchasing in the AHP market segment, due to lower
costs resulting from both state mandate exemptions
and the ability to attract firms with relatively lower
expected medical costs.9 This would increase premiums
by about 2 percent for firms left in the traditional
state-regulated market.
Erosion of managed care. Some types of insurance
companies might gain a competitive advantage from
selling through an AHP, while others may not be able
to adjust. It is questionable whether companies that
have specialized in providing HMO coverage, which
has dominated California’s health insurance market
and helped keep premiums below the national average
(at least in the past), could compete as well as those
that offer PPO coverage and high cost-sharing plans in
the AHP market. It might be harder for HMOs that
traditionally have offered comprehensive benefits and
first-dollar coverage to increase cost-sharing (through
deductibles) and more difficult to offer HMO coverage
that is stripped down. Depending on the language in
the final legislation, however, HMOs might be able
A model developed by the Urban Institute to estimate
to offer lower-cost policies through AHPs by avoiding
the impact of HR 660 on California found that
managed care consumer protections (for example,
36 percent of covered business establishments in the
laws requiring that HMOs have adequate provider
small-group market would be covered by AHPs after
networks, provide maternity coverage, and give
the law took full effect. The Urban Institute study
consumers access to independent external review of
estimated that AHPs would experience an average
coverage denial decisions).
price decrease of 14 percent, in part due to favorable
risk selection, causing premiums to rise in the stateregulated portion of the small-group market by
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C ALIFORNIA H EALTH C ARE F OUNDATION
Increased Risk of Plan Insolvencies, Fraud
California small businesses and their employees with
Weaker financial standards. Consumers receiving
unpaid medical bills and without health insurance.
coverage from AHPs might be at increased financial
Ultimately, this could result in pressure on Congress
risk due to federal solvency standards that are less
to have the government cover the cost of future plan
stringent than state standards. While creating less-
insolvencies, thereby putting federal taxpayers at
expensive coverage options that may be beneficial to
financial risk.
some employer groups, self-insured AHPs could place
many California consumers at risk of having to pay
their own claims in case of a plan insolvency because
these AHPs would be subject to new federal solvency
rules that are much weaker than state standards.
Exposure to fraud. In addition to the financial risk
health insurance consumers generally face due to
potential plan insolvencies resulting from mismanagement or adverse business conditions, businesses and
individuals may be at increased risk of fraud.10 In the
Self-insured, multiple-employer purchasing organiza-
past, promoters have sold illegal health plans through
tions, including MEWAs and those sponsored by
associations they established or through existing legiti-
associations, have a long history of financial instability
mate trade and professional associations. States have
that ultimately prompted the U.S. Congress in 1983
an array of tools enabling state regulators to find and
to give states a great deal of latitude to regulate them.
quickly shut down phony health plans to protect asso-
California is among the states that regulate self-insured
ciations, small businesses, and their workers. Given
MEWAs, including those sponsored by business
past experience in addressing fraud, by not expanding
associations, but the majority of states require such
administrative tools available to the federal regulators,
arrangements to be licensed as insurers and do not
the legislation may not give the U.S. Department of
allow self-insured MEWAs to operate.
Labor the authority it needs to respond quickly and
The legislation would establish new federal solvency
standards governing self-insured AHPs. However, the
proposed standards are much less stringent than those
that California applies to insurance companies and
HMOs. The U.S. Department of Labor, which would
administer these standards, has no experience in regu-
effectively. The bills’ broad preemption of state law
would severely limit states’ ability to stop promoters
from selling phony health plans to federally licensed
AHPs. The combination of restricted state jurisdiction
and limited federal authority may open the door to
opportunities for additional fraud.
lating health plan solvency and would have to develop
Conclusion
such expertise. Should self-insured AHPs become
Although the total number of uninsured is not likely
insolvent, the legislation provides no guaranty fund
to change much under AHP legislation, small groups
to cover unpaid claims. The lack of strong solvency
with healthier employees might enjoy lower premiums
standards—coupled with an inexperienced federal
than they now have, but groups whose members have
regulatory agency with limited administrative tools to
medical conditions might have increased difficulty in
prevent insolvency—may increase the risk of plan
finding affordable coverage. Premiums for most people
failures. Insolvent federally regulated AHPs may leave
Insurance Markets: What Would Association Health Plans Mean for California?
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7
covered by California’s small-group market would likely rise somewhat. Additionally, the legislation may
leave millions of Californians without many consumer
ENDNOTES
1. The U.S. House of Representatives passed the Small
protections available under state law while increasing
Business Health Fairness Act of 2003 (HR 660) in
the risk of insolvency and fraud.
June 2003. The legislation faces an uncertain future
in the U.S. Senate where opposition to it has been
The introduction of AHPs could provide small
employers with more leverage to prompt insurers to
experiment with new, less expensive benefit designs.
However, AHPs also could cause an erosion of managed
stronger than in the House over the years.
2. Employers offering fully insured health benefits must
also comply with federal employee benefits law.
3. For more information see Debra L. Roth, Insurance
care in California, which ultimately could result in
Markets: Rules Governing California’s Small Group
higher costs for employers and individuals.
Health Insurance Market, California HealthCare
Foundation, June 2003 (hereinafter CHCF Small
Finally, neither the AHP legislation—nor, for that
Group Market) (http://ww.chcf.org/topics/view.
matter, the state and federal laws currently governing
cfm?itemID=20740).
insurers and employee benefit plans—provide long-
4. Urban researchers modeled the impact of the AHP
term solutions to escalating health care costs that make
legislation using a range of assumptions, all of which
it increasingly difficult for small businesses to offer and
resulted in a change in the number of uninsured of
pay for employee health benefits. Many small business-
one percent or less.
es, especially those with many low-wage workers,
simply lack the financial resources to provide health
benefits. To begin offering insurance, small businesses
5. The California Department of Managed Health Care
regulates HMO coverage under the Knox Keene Act
and the state Department of Insurance regulates more
traditional health insurers. Insurers or managed care
may need additional financial resources. They also need
firms offering preferred provider organization (PPO)
guaranteed access to affordable insurance, regardless of
products can obtain licenses to sell such products
whether some group members happen to have medical
from either agency.
conditions.11 The AHP legislation provides neither.
6. The larger the employer, the more likely it will selfinsure its health plan. Very few small employers (with
2–50 employees) self-insure their health plans because
of the financial risk posed. See Patricia Butler and
A C K N OW L E D G M E N T S
Karl Polzer, Regulation of ERISA Plans: The Interplay
of ERISA and California Law, California HealthCare
Prepared for the California HealthCare Foundation by
Foundation (June 2002) for further discussion.
Mila Kofman of Georgetown University’s Health Policy
Institute and Karl Polzer, M.P.A., a health policy analyst
based in Washington, D.C.
7. This figure was derived by dividing CBO’s estimated
number of AHP enrollees in the small-group market
(7.5 million) by its estimate of the size of the small
group market in 2008 (30.7 million)
(http://www.chcf.org/topics/view.cfm?itemID=19795).
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C ALIFORNIA H EALTH C ARE F OUNDATION
8. See Congressional Budget Office, letter to the
Honorable George Miller, Senior Democratic
Future editions will identify trends in California’s
Member, Committee on Education and the
insurance markets, analyze regulatory and policy
Workforce, U.S. House of Representatives, June 18,
issues, and provide industry updates. Analyses
2003, downloaded from CBO’s Web site August 8,
will be posted as they become available at the
2003 (http://www.cbo.gov/showdoc.cfm?index=4352
California HealthCare Foundation’s Web site at
&sequence=0), and Congressional Budget Office Cost
www.chcf.org.
Estimate: HR 660: Small Business Health Fairness
Act of 2003 (as passed by the House on June 19,
2003), July 11, 2003, downloaded from CBO’s Web
site August 6, 2003 (http://www.cbo.gov/showdoc.
cfm?index=4413&sequence=0).
The California HealthCare Foundation’s program
area on Health Insurance Markets and the
Uninsured seeks to improve the functioning of
California’s health insurance markets, particularly
the small group and individual markets, and to
9. Increasing Small-Firm Health Insurance Coverage
expand coverage to the uninsured. For information
through Association Health Plans and Healthmarts,
on the work of Health Insurance Markets and the
Congressional Budget Office, January 2000.
Uninsured, contact us at [email protected].
Downloaded from CBO Web site April 3, 2003
(http://www.cbo.gov).
10. For more information see Mila Kofman, Kevin Lucia,
and Eliza Bangit, Proliferation of Phony Health
Insurance: States and the Federal Government Respond,
BNA Plus, August 2003.
11. See Karl Polzer and Jonathan Gruber, Assessing the
Impact of State Tax Credits for Health Insurance
Coverage, California HealthCare Foundation,
June 2003 (http://www.chcf.org/topics/view.cfm?
itemID=20727).
F O R M O R E I N F O R M AT I O N , C O N TA C T :
California HealthCare Foundation
476 Ninth Street
Oakland, CA 94607
tel: 510.238.1040
fax: 510.238.1388
www.chcf.org
Insurance Markets: What Would Association Health Plans Mean for California?
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